Yield of Corporate Bonds
The BondIT asset management software has been designed to do your analysis for you, saving valuable time and resources and creating instant portfolio optimization across your entire suite of fixed income investments to maximise corporate bond yields. Using leading data science and software development methodologies, we have created an asset management program specifically for investment businesses managing the needs and objectives of their investors. You can completely customize the BondIT asset management tools to effortlessly optimize fixed income portfolio management using either the standard fixed income analytics that comes with BondIT, or by working closely with us to develop your bespoke analytics which is client-specific or business-specific or even both.
We have taken the guesswork out of managing your clients’ interests with a holistic fixed income trade solution that instantly generates compliant investment proposals, solves rebalancing issues and bond allocation, and is fully customizable to work within whatever parameters and investment objectives matter to your business and clients most. With BondIT, you can utilize advanced laddering strategies to better manage the pre-retirement and post-retirement investment objectives of your clients. Custom-immunize liabilities including down payments on the property – both new home and vacation properties – as well as college tuition funds for children and grandchildren. Post-retirement income generation will mean shifting the management practice for clients’ bond funds and BondIT helps you effortlessly alter investment objectives, producing strategies and opportunities aligned with clients’ changing statuses and income expectations.
What are corporate bonds?
Fixed income instruments come in two types: bonds on the corporate bonds market and municipal bonds, otherwise known as government bonds. Municipal bonds are issued by government organizations at all levels. For example, U.S. Treasury bonds are government-backed bonds that are typically low risk and come with tax offsets for investors. Generally speaking, government bonds come with a range of incentives for investors, not just lower risks. Tax breaks and offsets can significantly affect the overall bond income generated by municipal bonds, helping clients to realize wealth management objectives more sustainably. However, municipal bonds are also generally low bond yield fixed income options. Because they are significantly lower in fixed income risk than other corporate bonds on offer, the interest rate at which they are issued is also significantly lower. While a portfolio of government bonds may appear to be a safe income source, there are fixed income high yield options to also be considered. The role of the portfolio manager and advisor is to adequately manage the risk of all asset classes to return the best investment income for their clients. BondIT helps to control the time and resourcing spent evaluating investment risk and opportunities by completing the in-depth market analysis in a fraction of the time it traditionally takes.
Using leading data science, BondIT utilizes a range of standard fixed income analytics to complete and return investment proposals instantly. You can choose to use these standard analytics, or you can choose to work closely with our team to design bespoke analysis tools and solutions which are tailored specifically to the needs of your clients and the needs of your business, helping you choose which corporate bonds to buy and which municipal bonds. BondIT works to produce instantly optimized portfolios ideal for the investment environment you are managing.
The yield of corporate bonds is generally higher than municipal bonds due to the higher credit risks that these type of fixed income assets come with. Investment-grade corporate bonds are low risk fixed income bonds. They are typically offered at a lower interest rate by the issuer, backed by a high credit rating assigned by independent credit rating agencies.
Corporate bonds are essentially debt instruments which are issued by companies seeking an injection of cash flow into their business. They, like government bonds, are issued at a set bond price for a fixed interest rate. When the investor purchases individual bonds – or utilizes fixed income ETFs or mutual bond funds – they make a fixed income investment with a projected investment return. That total return is paid in regular interest payments (also known as coupon payments) over the term of the bond as well as the return of their original capital investment at the bond maturity date. Bond terms can vary with corporate bonds generally lasting between 3 to 5 years.
The biggest risk to the yield of corporate bonds is the risk of default. If the bond issuer is unable to meet their financial obligations, liquidators may seize control of the business and sell off its assets to repay its creditors. If this situation arises then not only does the investor lose the regular interest payments projected over the term of the bond, they may also lose their initial capital investment, or part thereof. High risk fixed income high yield bonds like these are known as junk bonds. They come typically with a very low credit rating and a high default risk. However, high risk means high reward. Should the corporate bonds mature as expected and the interest payments regularly paid, then the income generated from junk bonds can be highly lucrative. A well-balanced investment portfolio may include a selection of junk bonds offset against lower rate and lower risk municipal bond opportunities. BondIT completes hours of analysis instantly and offers portfolio managers and advisors access to thorough and in-depth market analysis and proposal optimization tool which helps to take the guesswork out of managing bond portfolios. Easily weigh up the benefits of higher risk fixed income funds against more sustainable and lower-risk asset management practice to produce the most optimal investment strategy for your clients.
Other investment risks associated with both high yield corporate bonds as well as lower yield and lower risk government bonds include inflation risk, tax risk and interest rate risk. Inflation risk is the risk that inflation will increase so substantially over the term of the bond that effectively renders any income generated by that bond as worthless. For example, if the interest rate offered on a 5-year corporate bond is 5% but inflation rises by 8% over the term of the bond, then that is a 3% loss sustained on that bond.
Tax risk is more likely to affect government bonds. Some government bonds are offered to investors tax-free which mean that any income generated throughout the term of the bond is not included in the investor’s income tax. Changing governments or changing government environments, however, can affect which bonds are considered tax free. The risk of this goes both ways. An investor could hold tax free bonds which, throughout the term of the bond, become taxable or they may hold municipal bonds which are taxed and then become tax free over the term of the bond.
Interest rate risk is the risk that the federal reserve will lower interest rates throughout the term of the bond. Higher interest rates make for better-investing conditions, whether you measure the yield of corporate bonds or government bonds. If the interest rates are lowered during the term of a bond then the bond issuer may call the bond early, returning the investment capital to investors and then issuing new bonds at a lower interest rate. This means that investors fail to make the income originally projected on the bond and must either consider new bond allocation strategies or purchase the new bond at the lower interest rate.
To find out how BondIT can help your business achieve its investment goals and optimize portfolios within the bond market to instantly create a higher yield of corporate bonds, speak with a consultant today. We’ll take you through BondIT’s full functionality, demonstrating where it has already increased efficiency and lowered costs for our clients.